Heading for a bumpy landing
Published: November 6 2008 02:00 | Last updated: November 6 2008 02:00
Airlines were being fried in oil. The high price of aircraft fuel, especially the peaks of the past year, placed enormous strain on the sector. Recent price declines have given them relief, but the industry is still in trouble. Demand for seats and for air cargo is falling, and there is over-capacity in the sector.
Airlines - and politicians - must act if the industry is to adapt successfully.
Oil is one of the industry's biggest expenses. The sector suffered as the crude price rose, peaking at $147 a barrel in July. According to the industry body, the International Air Transport Association, 30 airlines closed this year.
But the sector had been responding effectively to the higher oil price. Fuel efficiency has improved markedly and staffing costs have been cut. Aircraft have been mothballed to reduce spare capacity. It is a significant relief that the oil price has slipped to under $65 a barrel. But airlines must now cope with the global slowdown. The streamlining they have already undertaken will help, but the sector still faces a bumpy ride ahead.
The recent capacity cuts have not kept pace with the fall in demand. Passenger numbers have fallen for the first time since the Sars epidemic in 2003, and cargo transport has fallen faster than at any time since the technology crash in 2001. As Giovanni Bisignani, chief executive of the IATA, said, "what we save in fuel, we lose in revenue."
And in the longer term, there are still too many companies operating too many aircraft. International competition, notably from Emirates, Qatar Airways and Etihad Airways, will only deepen. The growing middle classes of India and China will be able to support serious international carriers.
Politicians must, therefore, remove the barriers to consolidation. At the moment, EU airlines cease to be considered "European" if non-EU investors hold more than 49 per cent of the votes. And non-Americans can own no more than 25 per cent of the voting rights in US airlines. Any attempt to build an airline across two jurisdictions is, therefore, not allowed. So, British Airways is allowed to merge with fellow European airlines, such as Spain's Iberia, but not American Airlines. Carriers may seek exemptions from anti-trust laws so they can engage in bilateral agreements across borders, but these are no substitute for full-blown deals.
The EU has, rightly, been calling for these absurd ownership restrictions to be removed as part of the second round of the EU-US "open skies" negotiations, due to end in 2010, but the US is unwilling to concede on this issue. It is wrong to do so. There should be no tolerance for protectionism, whether it comes from state aid or regulation.
For now, the fall in the oil price seems to have removed one immediate problem for the sector. But that may not last. The industry cannot plan a future on the assumption that prices and pressures will not move against it. Carriers are still in trouble and politicians must play their part, not with subsidies but by removing obstacles to consolidation. Airlines may have flown out of the frying pan, but they are headed into the fire.
Copyright The Financial Times Limited 2008
Published: November 6 2008 02:00 | Last updated: November 6 2008 02:00
Airlines were being fried in oil. The high price of aircraft fuel, especially the peaks of the past year, placed enormous strain on the sector. Recent price declines have given them relief, but the industry is still in trouble. Demand for seats and for air cargo is falling, and there is over-capacity in the sector.
Airlines - and politicians - must act if the industry is to adapt successfully.
Oil is one of the industry's biggest expenses. The sector suffered as the crude price rose, peaking at $147 a barrel in July. According to the industry body, the International Air Transport Association, 30 airlines closed this year.
But the sector had been responding effectively to the higher oil price. Fuel efficiency has improved markedly and staffing costs have been cut. Aircraft have been mothballed to reduce spare capacity. It is a significant relief that the oil price has slipped to under $65 a barrel. But airlines must now cope with the global slowdown. The streamlining they have already undertaken will help, but the sector still faces a bumpy ride ahead.
The recent capacity cuts have not kept pace with the fall in demand. Passenger numbers have fallen for the first time since the Sars epidemic in 2003, and cargo transport has fallen faster than at any time since the technology crash in 2001. As Giovanni Bisignani, chief executive of the IATA, said, "what we save in fuel, we lose in revenue."
And in the longer term, there are still too many companies operating too many aircraft. International competition, notably from Emirates, Qatar Airways and Etihad Airways, will only deepen. The growing middle classes of India and China will be able to support serious international carriers.
Politicians must, therefore, remove the barriers to consolidation. At the moment, EU airlines cease to be considered "European" if non-EU investors hold more than 49 per cent of the votes. And non-Americans can own no more than 25 per cent of the voting rights in US airlines. Any attempt to build an airline across two jurisdictions is, therefore, not allowed. So, British Airways is allowed to merge with fellow European airlines, such as Spain's Iberia, but not American Airlines. Carriers may seek exemptions from anti-trust laws so they can engage in bilateral agreements across borders, but these are no substitute for full-blown deals.
The EU has, rightly, been calling for these absurd ownership restrictions to be removed as part of the second round of the EU-US "open skies" negotiations, due to end in 2010, but the US is unwilling to concede on this issue. It is wrong to do so. There should be no tolerance for protectionism, whether it comes from state aid or regulation.
For now, the fall in the oil price seems to have removed one immediate problem for the sector. But that may not last. The industry cannot plan a future on the assumption that prices and pressures will not move against it. Carriers are still in trouble and politicians must play their part, not with subsidies but by removing obstacles to consolidation. Airlines may have flown out of the frying pan, but they are headed into the fire.
Copyright The Financial Times Limited 2008
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